Quiz #10

• 1. The Australian Treasury equates the NAIRU with full employment and uses this to calibrate their structural deficit estimates. Accordingly, these deficit estimates will be
• difficult to assess because the Treasury forward estimates are subject to forecasting inaccuracy.
• biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.
• biased downwards thus indicating, at any point in the business cycle, that the government fiscal stance is less expansionary than it actually is.
• 2. A national spending gap will emerge if desired domestic saving suddenly exceeds domestic investment. The sectoral balances relationship (from the national accounts) shows that
• it is important in these situations to always increase the budget deficit to match the fall in private spending.
• it is important in these situations for banks to reduce interest rates to stimulate investment.
• the resulting spending gap may manifest as a combination of rising net exports and/or rising budget deficits.
• 3. The experience of Norway with its strong net exports contribution shows that
• running budget deficits are not sufficient to generate low levels of unemployment.
• running budget deficits will be sufficient to generate low levels of unemployment.
• countries should pursue export-led growth strategies to generate low levels of unemployment.
• 4. The rising public debt levels that we are seeing will have to be paid back as the debt matures. These payments and the associated interest servicing will
• reduce the room for other non-inflationary discretionary deficit spending because they will "fill up the spending gap" more quickly.
• reduce the capacity of the private sector to save because they will require cuts backs in the deficit to support the repayments.
• not reduce the room for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".
• 5. The Government could stimulate employment growth by cutting real wages across the board (which would not alter wage relativities unfairly)
• only if the real wage cuts reduced the overall desire to save by the non-government sector.
• only if workers accepted the cuts and agreed to supply more labour.
• because this will reduce labour costs and align them better with the declining revenue that the recession has caused.

Quiz #10 answers

• 1. The Australian Treasury equates the NAIRU with full employment and uses this to calibrate their structural deficit estimates. Accordingly, these deficit estimates will be

Answer: biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.

Explanation: Please read Structural deficits - the great con job! or post a comment for further discussion.

• 2. A national spending gap will emerge if desired domestic saving suddenly exceeds domestic investment. The sectoral balances relationship (from the national accounts) shows that

Answer: the resulting spending gap may manifest as a combination of rising net exports and/or rising budget deficits.

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 3. The experience of Norway with its strong net exports contribution shows that

Answer: running budget deficits will be sufficient to generate low levels of unemployment.

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 4. The rising public debt levels that we are seeing will have to be paid back as the debt matures. These payments and the associated interest servicing will

Answer: not reduce the room for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 5. The Government could stimulate employment growth by cutting real wages across the board (which would not alter wage relativities unfairly)

Answer: only if the real wage cuts reduced the overall desire to save by the non-government sector.

Explanation: Please read Deficit spending 101 - Part 1 or post a comment for further discussion.